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New nationalisation threat in Venezuela?

The spectre of a state grab of oil assets looms as the nation moves to rewrite its constitution

This week a key aide to Venezuelan president Nicolas Maduro threw something akin to a ticking time bomb into the middle of the country's oil sector.

Hermann Escarra, a constitutional lawyer and adviser to the president, told a group of oil workers on July 4 that articles to nationalise 100% of state oil company PdV's joint venture projects had been drawn up as part of Maduro's push to rewrite the nation's constitution.

Maduro has called for a National Constituent Assembly to draft a new constitution as the country's political and economic crisis deepens. The move could allow the president to circumvent the opposition-controlled National Assembly.

An election to select delegates for the new assembly is scheduled for 30 July, though the opposition is boycotting the vote and considers the whole exercise an illegitimate power grab. Escarra is expected to have a seat on the assembly. The Wall Street Journal reported last month that the current head of PdV, Eulogio del Pino, was going to leave the company to take up a seat in the assembly as well.

PdV is the majority partner in more than 40 joint ventures, though the most important are a handful of producing Orinoco Belt heavy oil projects. The partners in these ventures include Chevron, Statoil, Total, Repsol, India's ONGC Videsh, Russia's Rosneft and China's CNPC. PdV holds a majority 60% stake in all of these ventures, but the company's foreign partners have played a vital role in bringing cash and technology to the projects.

Because PdV's foreign partners are paid in oil, nationalising the minority stakes would free up additional crude for the company to sell, bringing a short-term boost in cash flow to the financially troubled company.

But a full nationalisation of the industry would be devastating to the prospects for Venezuelan oil. Output has been on a steady slide over the past decade, in large part because the 2007 nationalisation left an investment gap that PdV has never come close to filling. The mature oilfields where PdV owns a 100% stake have suffered from chronic underinvestment and have led a 15-year slide in Venezuela's crude output.

The only new PdV projects to get off the ground have been those in the Orinoco where foreign partners have ponied up financing. Without these projects the collapse in production would have been even worse. If PdV assumes full ownership over the Orinoco projects, many of which are in the earliest stages and still require significant funding to ramp up output, they would almost certainly falter for lack of investment.

The talk also sends mixed signals to key Venezuela allies, especially Russia, at a sensitive time. PdV has been in talks with Russia's Rosneft over potentially selling stakes in up to five projects, including the Petropiar venture, as the company looks to raise cash ahead of $3bn in bond payments due in October and November this year. Nationalising the Orinoco belt would also mean taking over interests held by China's national oil companies, which have been crucial financial backers for the Venezuelan government.

Any nationalisation move would also trigger a flood of costly lawsuits as companies look to recoup their investments. Venezuela is still dealing with the fallout from the 2007 oil nationalisations as cases involving ExxonMobil and ConocoPhillips remain unresolved.

In the end, common sense may well prevail. But the upcoming National Constituent Assembly will bring yet more headaches for Venezuela oil investors already besieged by the country's rumbling economic and political crises.

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